Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Health Insurance Is Eating Your Raise
Transcript
- Lucas: So the employment cost index came out back in January with wages at 177.5, up from 176.23 the quarter before. That is a 3.4 percent annualized gain — respectable, right? Luna: Respectable on paper. But I think a lot of workers would say their paycheck doesn't feel three and a half percent bigger. Lucas: Exactly. And the ECI is actually the Fed's preferred wage measure because it captures the full cost of employing someone, not just hourly earnings. But here's the thing — the wage component is only part of the story. The benefit component — health insurance, retirement contributions, payroll taxes — has been climbing faster. Luna: How much faster? Do we have a number from that January release? Lucas: The benefits index for private industry workers rose 4.7 percent year-over-year as of January. But employer-paid health insurance specifically? That's been running closer to 6 percent annually for the last couple of years. So your total compensation package goes up, but a bigger slice goes to benefits you might not even see. Luna: That is the silent raise eater. Your employer tells you you're getting a 3 percent raise, but the premium for your health plan went up 6 percent — your net take-home barely moves. Lucas: Right. And the average hourly earnings data we got for April — $37.40 — that's up from $37.35 in March. So call it a 0.13 percent monthly gain. Annualized that's about 1.6 percent. But CPI over the same period? April CPI was 332.4, up from 330.29 in March — that's a 0.64 percent monthly increase. Prices are rising faster than that hourly paycheck. Luna: So the nominal raise is getting squeezed from both sides — benefit costs on the employer side, and consumer prices on the spending side. Lucas: Precisely. And this disconnect is why consumer sentiment hit a fresh record low last week, even though the labor market is objectively strong. People see the job numbers, they see their base wage going up a little, but their real purchasing power — what that wage buys after inflation and after benefit deductions — feels flat or even negative. Luna: The bond market seems to agree, right? The ten-year breakeven inflation rate is at 2.40 percent. That's actually up a tick from 2.39 the day before. So bond traders expect inflation to stay around that level for the next decade. Lucas: Yes. And 2.4 percent is above the Fed's 2 percent target. So the market is basically saying 'we don't think the Fed has this fully under control yet.' Meanwhile, the core PCE price index — which is the Fed's preferred inflation gauge — was at 129.3 in March, up from 128.9. That's a 0.3 percent monthly gain, annualized around 3.6 percent. Still above target. Luna: So workers are caught between a strong labor market that should boost wages, and sticky inflation that eats those gains. And the ECI tells us employers are paying more per employee, but that extra cost isn't all showing up in workers' pockets. Lucas: Let's put a concrete number on it. Median usual weekly earnings as of early 2025 were $1,204. That was up from $1,159 a year earlier — about a 3.9 percent increase. But if your family health insurance premium rose 6 percent, and that premium is, say, $500 a month from the employer's perspective — the employer is paying roughly $30 more per month for that coverage. That's $360 a year. On a $60,000 salary, that's 0.6 percentage points of your raise gone before you even see it. Luna: And that's just the employer side. The employee share of premiums has been rising too. So your take-home is hit twice. Lucas: Exactly. And this is why the ECI matters more than the headline average hourly earnings number. The ECI captures total compensation. When the Fed looks at wage pressure, they look at ECI because it shows the total cost of labor. If benefits are rising fast, that can feed into higher prices down the line as companies pass those costs through. Luna: Which brings us back to the inflation picture. Core CPI ex food and energy was 335.4 in April, up from 334.17 in March. That's a 0.37 percent monthly increase. Services inflation is still sticky — things like rent, medical care, insurance. Lucas: Rent is a big one. Shelter costs are still running around 5 percent annually. That's the single largest component of CPI for most households. So even if your wage is growing 3 percent, shelter alone is eating more than that. Luna: This is exactly the kind of episode where I think listeners might find it useful — like, we're walking through the actual data that explains why their paycheck feels tight. Lucas: Yeah, I hope so. And if today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Luna: It really does help keep the economics conversation going without any sponsor interruptions. Lucas: So back to that benefit cost growth — one thing that's interesting is that the ECI's benefit component tends to lag the economic cycle. During the pandemic, benefit costs actually slowed because a lot of people lost employer-sponsored coverage. Then as the labor market tightened, companies had to compete for workers, so they boosted benefits. Now we're in a phase where those costs are still elevated even as wage growth moderates. Luna: So employers are still spending more on labor, but the mix is shifting away from cash wages toward benefits. That could be a structural shift if health care costs keep rising faster than productivity. Lucas: That's the key question. If productivity growth picks up — say with AI and automation — then companies can absorb higher benefit costs without raising prices. But if productivity stagnates, then either margins shrink or prices go up. And we've seen margins hold up pretty well so far. Luna: The Russell 2000 is up 3.4 percent in the last five days alone. Small caps are rallying. That suggests investors expect economic growth to continue, which is good for the labor market. Lucas: Yeah, the broad market is up — S&P 500 at 7,473, the Dow at 50,580, NASDAQ at 26,344. All up over the past week. So the market is pricing in continued expansion. But the consumer sentiment data tells a different story. The Michigan survey hit a record low in May, partly on inflation worries tied to the Iran situation. Luna: There's a disconnect between financial conditions and Main Street conditions. Markets are forward-looking, but households are backward-looking — they feel the cumulative effect of three years of above-target inflation. Lucas: Right. And the breakeven inflation rate at 2.4 percent suggests the bond market expects inflation to stay elevated for a while. That means the Fed is likely to keep rates where they are — the last thing they want is to cut rates and then have inflation re-accelerate. Luna: So the takeaway for workers: don't just look at your hourly wage or your annual raise percentage. Look at your total compensation package — what's the health insurance premium doing? What's the deductible? Are your retirement contributions going up? Because the headline wage number is only part of the story. Lucas: And for policymakers, the ECI is a crucial signal. If benefit costs keep rising at 4 to 5 percent while wages grow at 3 percent, total compensation is still running hot enough to keep the Fed cautious. The next ECI release is in July for the second quarter — that will be a key data point. Luna: I'll be watching. It might tell us whether the benefit cost acceleration is peaking or still building. Lucas: Same here. For now, the picture is one of a labor market that's still strong but where workers' purchasing power is being quietly squeezed by things they don't see on their pay stub.